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Is salary sacrifice worth it?

Kyle Chubb | Wednesday 27th July, 2022

Thinking about setting up salary sacrifice for your company? Wait!

Salary sacrifice can help your employees keep more of what they earn by lowering their taxes. Plus, as an employer, you’ll save by trimming your National Insurance contributions (NIC).

But is salary sacrifice worth it? In this article, we’ll explore the pros and cons as well as the different ways both you and your employees can take advantage.

What is salary sacrifice?

In a nutshell, salary sacrifice is where an employee agrees to swap part of their salary for a non-cash benefit.

This lowers their annual salary - with the ‘sacrificed’ earnings being used to fund another benefit provided by the company.

One of the most popular ways of using salary sacrifice is for workplace pension contributions.

Rather than paying into their pension from their pre-tax earnings, the employee reduces their overall salary - with the contribution instead coming entirely from the employer.

Because their take-home pay is lower 'on paper' the employee will then be subject to less National Insurance - as well as benefitting from tax relief on their pension contribution.

As the employer, you'll also make savings on the National Insurance owed for your employees.

"Salary sacrifice is where an employee agrees to swap part of their pre-tax salary for a non-cash benefit"

Other uses of salary sacrifice

The most popular use of a salary sacrifice scheme involves workplace pensions. However, employers can offer a range of other non-cash employee benefits.

Here are a few examples:

  • Childcare vouchers
  • Cycle-to-work schemes
  • Company gym membership
  • Low emission vehicles
  • Buying additional annual leave
  • Professional development courses

 

The pros of salary sacrifice

The primary advantage of a salary sacrifice scheme is:

  • employees to reduce their National Insurance
  • employees get tax relief on the money they add to their pension
  • employers to reduce their National Insurance

Employees benefit from keeping hold of more of their earnings and trimming their tax bill. Let's look at a quick example.

Sam works for an SME and earns £50,000. Based on a minimum pension contribution of 5% (or £2,500 a year), Sam’s net pay after tax and pension would be £34,698.10.

After salary sacrifice, Sam's earnings drop to £47,500. That means he's now being taxed on £47,500, rather than £50,000.

He's still contributing the same £2,500 (5%) into his pension, but it's no longer not included in his total salary. This leads net pay to increase to £35,029.35 with no impact on total contributions into his workplace pension scheme.

In some cases, employers add their National Insurance savings from salary sacrifice into the employee’s workplace pension as well, increasing their overall contribution and giving them a boost on the way to retirement.

The table below shows how much an employee earning £50,000 a year would save by switching to a salary sacrifice pension scheme.

table showing employee national insurance savings with salary sacrifice - updated November 6th 2022

And this table highlights the impact for employers.

table showing employer national insurance savings with salary sacrifice - updated November 2022

Of course, the more employees you have, the larger your savings will be.

Non-cash benefits such as pension contributions and cycle-to-work schemes are exempt as employers pay National Insurance on gross salaries.

Further benefits depend on the benefit but include:

  • Better employee engagement and retention
  • A more attractive benefits package for new hires
  • Improved mental and physical well-being of your employees from corporate gym memberships
  • Higher levels of morale and productivity due to better care of your employee’s children

"You can switch to salary sacrifice by updating your employment contract. Any changes will need to be agreed by your employer first"

The cons of salary sacrifice

While there are several benefits, salary sacrifice can also have a few negative consequences.

Here are some key factors to keep in mind that could affect your final decision.

As an employer, you could encounter increased administration costs when you implement a salary sacrifice scheme.

These typically include:

  • cost of amending employment contracts
  • updating your payroll
  • submitting another compliance check

Of course, the savings you make from switching to salary sacrifice could help to cover this initial cost. Penfold can also take care of this for you, making the entire process effortless.

It's also worth noting that any employees on a low income may not be eligible to join if salary sacrifice means their income would fall below minimum wage.

Additionally, because salary sacrifice leads to a lower overall income, it can impact an employee's salary-based benefits and ability to borrow money.

In particular, it could have a knock-on effect on:

  • life insurance  
  • mortgage borrowing
  • statutory maternity/paternity pay
  • credit card borrowing limits 
  • unemployment benefits
  • incapacity benefit

It’s important to note that salary sacrifice contributions are considered solely employer contributions.

If an employee is part of a defined benefit or defined contribution pension scheme, any contributions via salary sacrifice are unlikely to be refunded if they change their mind and want to opt out of auto enrolment.

Summary: Is salary sacrifice worth it?

For an employee, salary sacrifice can most definitely be worth it, especially as the pension contributions can help grow your retirement fund while paying less in taxes.

As an employer, it’s a good idea to check that your workplace pension provider will accept contributions under a salary sacrifice scheme.

If you'd like to find out more, read our complete guide to salary sacrifice.

Looking to trim your business' National Insurance bill with salary sacrifice?

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